Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Killer Joe

Posted by Killer Joe on May 18, 2006 at 14:09:06:

SJO,

I have to admit I got a chuckle out of reading this line from your post…“the worst historical decline in the Phoenix market was six months in 1981-82, when prices lost 7.9%”, but for a different reason than you might guess.

Back then I had two close sets of friends (husbands/wives) that picked up stakes and moved from SoCal to Phoenix. They were both in the construction trades as I was and did not know one another. They left SoCal about the same time, and both couples came back about the same time.

They each told me the story of how every other house on the block had a for sale sign. One of them put it this way…‘when it became clear that the only people buying the new construction where the people actually building the houses, they knew they where in trouble.’

Back then it was common for SoCal tradesmen to follow the work. The same thing happened in the mid '90s when it was slow in SoCal and Vegas was the place to find work. This, btw, caused quite a shortage of craftsman in SoCal, and if you were putting work out for bid you felt the impact. Never underestimate the impact the migration of trades people will have on a recent building boom once the dust settles. When the builders stop building there will be the inevitable drop in work for the trades people that follows, and this too will have an influence on the inventory as these folks move on.

As a side note, when a market goes from a +20% appreiciation rate to a -8% rate that is a HUGE swing.

KJ

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene

Posted by Gene on May 18, 2006 at 15:03:44:

I have been watching the AZ markets for the last 5 years. I sold my only rental in the Fall, because it looked as if the market was unraveling.

As for references…Look at the archives in news papers. Also look for trends in the Arizona association of realtors data.

45 to 60 days on the market dosn’t sound bad but here are a few thoughts to ponder…

1 - think about how just a year ago, most houses had multiple offers within hours.

2 - 60 DOM: dose that mean that they sold or that the seller dropped thier listing and relisted with a new agent? Or did the sellers just give up and decide to rent it? There are a lot of empty rentals right now.

Keep in mind, your realtor only makes $$ if you buy. You should do your own homework and not trust them when it come to your well being.

Its your money/credit, work hard to protect it and make it work for you.

Gene

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by SJO

Posted by SJO on May 18, 2006 at 14:37:34:

Mark, I posted this before, but take a look at this graph from the MLS. Sales are pretty slow now, but I wouldn’t categorize it as “unbelievably low”. They sure need to pick-up some…we’ll see. The best sales months, historically, are now through the summer (as you can see on the graph).

http://www.homesalenews.com/prices/1_Phoenix_Market_At_Glance.htm

Try This - Posted by Joe

Posted by Joe on May 17, 2006 at 14:37:58:

Or, if that doesn’t work. Type this into Google:

site:realestate.msn.com top 30

It’ll be the 1st link that comes up in the results.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Robert Campbell

Posted by Robert Campbell on May 20, 2006 at 17:48:16:

John,

>>> Based on present conditions there is no reason to think that the US will experience the meltdown that happened in Japan. The market conditions there were very different from the market conditions in the US today.

Please elaborate why you make this statement.

Thank you.

Robert Campbell

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 18, 2006 at 14:34:23:

“As a side note, when a market goes from a +20% appreiciation rate to a -8% rate that is a HUGE swing.”

Very true… But we aren’t buying just for appreciation are we? :stuck_out_tongue:
If there is 0% appreciation but everything else stays exactly like it is now I will be just fine.

Much more troubling to me was this comment:
“Of all the 100 markets we review, we think if you’re an investor in Phoenix, you should sell, because vacancy rates are already pretty high”

I haven’t seen a lot of ads for SFR rentals and I have no vacancies at all but I am not sure exactly what they are talking about in the article? Vacant houses for sale? For rent? Vacant apts? What?

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 18, 2006 at 15:51:07:

“There are a lot of empty rentals right now.”

Do you have any numbers on this? AZ Republic has very few rental SFRs advertised. I personally have zero vacancies.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDC)

Posted by Mark (SDC) on May 18, 2006 at 14:52:16:

Thanks a bunch. Great graph.

Interesting that even as MLS sales were topping out in mid 05, inventory began to go vertical.

Also interesting that as John pointed out, even as inventory skyrocketed and sales tanked, prices barely moved. (Sticky on the downside.)

Re: Try This - Posted by Dale-Ohio

Posted by Dale-Ohio on May 17, 2006 at 21:24:03:

Thanks it works great!!! Good article

THIS WORKS - Posted by SJO

Posted by SJO on May 17, 2006 at 14:48:02:

Thanks, the link you posted works fine.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by John Corey on May 21, 2006 at 07:43:53:

Robert,

It is my understanding that you have a newsletter that predicts the RE market (correct me if I have that wrong).

I will assume you are pretty sophisticated in such topics and therefore this could be a good dialog. It also will likely be rather academic and therefore not that useful from the average US real estate investor.

I will start by skimming the top on a lot of diverse issues.

Lets ignore RE for a few minutes and compare the two economies.

Culture. The culture between the two is pretty different when it comes to invention and conformity. The Japanese business culture respects authority and the idea that one should not rock the boat in the way that an American would do so. There is a lot of value placed on relationships and historical business connections.

The Japanese banks competed for business with each other and measured the success based on size. Profitability and the pricing of risk were less interesting. Long term share cross holdings meant that a company was part of a family and there would be a lead bank in the group. Loans were approved based on relationships and not based on the ability of the borrower to service the debt from current operations. Defaults were rare and even when they happened it was the role of the bank to overlook the default through new financing or something similar.

Business climate. Japan is an island and the past was rather negative with WWII after shocks. There was a national focus on growth and success overseas. They are dependent on foreign oil for 100% of their needs. Becoming a global power was part of the agenda. The government supported national champions. The champions were directed into certain industries and the financing from the government and the banks was cheap. Other things I will not spend time are ‘jobs for life’, unemployment close to 1% considered normal, weak or little real social security, very high savings rates (30%), many/most jobs come with an annual bonus which tends to be saved, metro Tokyo average home size of 600 sq ft with a 2 hour one way commute - family of 4 in 600 sq ft.

Educational system. The system is/was based on the German system from 1890. Conformity is important. The students are under pressure to perform. The kindergarden can define what companies you will interview with when you graduate from university. University is the first time a student is allowed to take their foot off the pedal. They use the 4 years to play a bit before entering the workforce.

Stock market. While being the 2nd largest for a time the Japanese market was not that sophisticated in comparison. Even today the exchange can not handle large volumes. Back in the 1980’s a lot of shares were held by banks and friendly companies so the market liquidity was not that great. The average Japanese saves a great deal but that mostly goes into passbook savings with the post office or other investments so the investment culture is not that similar to the US.

I am not aware of the mortgage market details in Japan. Is there a secondary market? What is the average term of a mortgage in Japan. I do know that the scarcity of land is a very large factor. Japan’s usable land mass is 15% or something similar. That means that a country that has 2/3rds the population of the US has a usable land mass about the size of CA. Little opportunity to spread out so people are really stretched when buying a home. Similar to many CA buyers.

What about then vs. now if we only focus on the US.

The mortgage market in the US has changed a lot. There are many more mortgage products that are not fixed. This has been going on over 30 or so years. ARMs were a new concept in the US when I took out my first ARM in 1982. There are now credit derivatives and other ways that lenders hedge their interest rate risk. Hence failure of the borrower to make the payments might be a lot less negative to the system then when there were more portfolio lenders. Credit derivatives are only about 5-7 years old.

The Japanese stock exchange was over 40,000. I remember reading newsletters from some folks who just could not see how the values were justified as there was almost no dividend yield and very little expectation of growth in earning. The banks were the largest holders of shares and when the shares melted down the banks had liquidity issues. Hence they could not lend. No money to lend and both the borrowers and the property owners were in trouble. The US has a stock market melt down at the end of the dot.com era and the result was very different.

Some would argue that the Japanese response to the market was wrong. That the Bank of Japan should have used liquidity to bail things out. They waited too long and then had to set interest rates at zero for over 5 years to stem the deflation. The world view is not clear as people are still debating what could have been and what caused what.

What does all of this mean?

For the most part the issues that impact real estate are local in nature. A plant closing because GM is failing is much more likely to be an issue in a specific RE market than the US national economy. Dayton OH lead the nation in foreclosures last year (I am told). This was mostly because of plant closings related to auto suppliers. Other parts of the US were seeing rising prices.

The biggest difference for why the US should not draw too many conclusions from Japan is because were operate very differently. The US believes less in central planning, has a different response to a stock market melt down, sees unemployment as less of an issue, banks attempt to price in the risk of default rather than chase market share, Silicon Valley mentality of eating your young rather than rock the boat in the corporate world, etc.

There are definitely macro economics lessons to be learned from Japan. As I strongly believe that real estate value is defined locally the macro issues mean a lot less as you cross the Pacific.

John Corey

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene

Posted by Gene on May 18, 2006 at 16:27:41:

I do not keep copies of everything I read. My statements are more a collective of everything I have read, and what I am seeing and hearing.

That is great that you do not have any vacancies, I would expect that most “savey investors” would not. However there are many speculators that are not as lucky.

So you sound very Bullish. Why are you so confident about your market?

Gene

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by J.D. Stewart

Posted by J.D. Stewart on May 19, 2006 at 17:06:35:

You can subscribe to HomeSale News for each PHX area zip code that you’re interested in. You’ll get a e-mail about once/week with the sales. I have 2 houses there and I watch for the houses that match my square footages. When it’s 1558’ for instance, I know it’s my floor plan and can see what the trend is doing. I’ve been subscribed for the last 6 months.

I’m wanting to move there soon, and like other posters have said, it almost makes more sense to just rent a $350K house for $1400/month and pack away the money saved for a better buying opportunity in the future.

J.D. Stewart

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Robert Campbell

Posted by Robert Campbell on May 21, 2006 at 10:00:30:

John,

First let me thank you for the thoughtful response. I’m not an expert on Japan, but let me briefly comment on some of your statements.

>>> Lets ignore RE for a few minutes and compare the two economies.

>>> Culture. The culture between the two is pretty different when it comes to invention and conformity. The Japanese business culture respects authority and the idea that one should not rock the boat in the way that an American would do so. There is a lot of value placed on relationships and historical business connections.

RMC: True, but I don’t see what significance this has on the ups and downs of a free market economy.

>>> The Japanese banks competed for business with each other and measured the success based on size. Profitability and the pricing of risk were less interesting. Long term share cross holdings meant that a company was part of a family and there would be a lead bank in the group. Loans were approved based on relationships and not based on the ability of the borrower to service the debt from current operations. Defaults were rare and even when they happened it was the role of the bank to overlook the default through new financing or something similar.

RMC: Mortgage loans in the US have been based on exotic mortgage programs easy money lending, not the ability of a borrower to pay back the debt.

>>> Business climate. Japan is an island and the past was rather negative with WWII after shocks. There was a national focus on growth and success overseas. They are dependent on foreign oil for 100% of their needs. Becoming a global power was part of the agenda. The government supported national champions. The champions were directed into certain industries and the financing from the government and the banks was cheap. Other things I will not spend time are ‘jobs for life’, unemployment close to 1% considered normal, weak or little real social security, very high savings rates (30%), many/most jobs come with an annual bonus which tends to be saved, metro Tokyo average home size of 600 sq ft with a 2 hour one way commute - family of 4 in 600 sq ft.

RMC: I don’t see the connection between the inevitable booms and busts of a free market economy. Sorry.

>>> Educational system. The system is/was based on the German system from 1890. Conformity is important. The students are under pressure to perform. The kindergarden can define what companies you will interview with when you graduate from university. University is the first time a student is allowed to take their foot off the pedal. They use the 4 years to play a bit before entering the workforce.

RMC: See comment above.

>>> Stock market. While being the 2nd largest for a time the Japanese market was not that sophisticated in comparison. Even today the exchange can not handle large volumes. Back in the 1980’s a lot of shares were held by banks and friendly companies so the market liquidity was not that great. The average Japanese saves a great deal but that mostly goes into passbook savings with the post office or other investments so the investment culture is not that similar to the US.

RMC: I think you’re making way too much about nothing here, but thats my view. It was a classic asset bubble that burst, and history shows this is not uncommon in free market economies.

>>> I am not aware of the mortgage market details in Japan. Is there a secondary market? What is the average term of a mortgage in Japan. I do know that the scarcity of land is a very large factor. Japan’s usable land mass is 15% or something similar. That means that a country that has 2/3rds the population of the US has a usable land mass about the size of CA. Little opportunity to spread out so people are really stretched when buying a home. Similar to many CA buyers.

>>> I not sure I understand the connection between Japan and California. The common argument against real estate downcycles is that where there is a shortage of land, home prices can’t fall much. I think you and I both know the fallacy in this type of thinking.

>>> What about then vs. now if we only focus on the US.

>>> The mortgage market in the US has changed a lot. There are many more mortgage products that are not fixed. This has been going on over 30 or so years. ARMs were a new concept in the US when I took out my first ARM in 1982. There are now credit derivatives and other ways that lenders hedge their interest rate risk. Hence failure of the borrower to make the payments might be a lot less negative to the system then when there were more portfolio lenders. Credit derivatives are only about 5-7 years old.

RMC: I don’t care how you try to hedge risk, the risk is still there and someone has to bear it. Risk never disappears. Someone always ends up holding the bag.

>>> The Japanese stock exchange was over 40,000. I remember reading newsletters from some folks who just could not see how the values were justified as there was almost no dividend yield and very little expectation of growth in earning. The banks were the largest holders of shares and when the shares melted down the banks had liquidity issues. Hence they could not lend. No money to lend and both the borrowers and the property owners were in trouble. The US has a stock market melt down at the end of the dot.com era and the result was very different.

RMC: You’re overlooking something very big: market psychology, which is common to all markets. The study of economics is a social science, not physical science. I could write a books about this, but I know you understand my point.

>>> Some would argue that the Japanese response to the market was wrong. That the Bank of Japan should have used liquidity to bail things out. They waited too long and then had to set interest rates at zero for over 5 years to stem the deflation. The world view is not clear as people are still debating what could have been and what caused what.

RMC: With 20/20 hindsight, we all would have done things differently, wouldn’t we? In my view you are overestimating the control of Central Bankers and are underestimating the control of market psychology. As a sidenote, Alan Greenspan recogizes my last point very well.

>>> What does all of this mean?

>>> For the most part the issues that impact real estate are local in nature. A plant closing because GM is failing is much more likely to be an issue in a specific RE market than the US national economy. Dayton OH lead the nation in foreclosures last year (I am told). This was mostly because of plant closings related to auto suppliers. Other parts of the US were seeing rising prices.

>>> The biggest difference for why the US should not draw too many conclusions from Japan is because were operate very differently. The US believes less in central planning, has a different response to a stock market melt down, sees unemployment as less of an issue, banks attempt to price in the risk of default rather than chase market share, Silicon Valley mentality of eating your young rather than rock the boat in the corporate world, etc.

RMC: Again, you overlook that 800 pound gorilla - market psychology. History has a clear record on credit-driven asset bubbles - they all burst. No exceptions.

>>> There are definitely macro economics lessons to be learned from Japan. As I strongly believe that real estate value is defined locally the macro issues mean a lot less as you cross the Pacific.

Thanks again, John.

Robert Campbell

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 18, 2006 at 16:48:41:

I am not at all bullish. I am troubled and concerned which is why I am asking all these questions. I know that the Phx market has risen greatly in the last few years. I also know that it has followed the SD market up and I know what is happening in the SD market so extrapolating that to the Phx market… I also know what is happening to interest rates and what that implies. I am not overly concerned about future appreciation since I am now fairly lightly leveraged. I have already ridden that wave. However anything that dragged down rents or caused widescale rental vacancies would be of great concern to me.

I also don’t want to jump off the deep end and start giving out 30 day notices to tenants in order to start selling properties, especially since I personally am seeing none of the dire straits that I keep hearing about. (Yes, I realize that I am an “anecdote” which again is why I am asking all the questions.)

It has been my experience that the Phx market has been very tight for SFR rentals (for at least the last 12-15 years). There just haven’t been many of them. (Apts yes. SFRs no.) If that is changing then I absolutely want to know about it. But I also want to KNOW that is what is happening and not guess that it is what happening.

Thanks and cheers,

Mark

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey

Posted by John Corey on May 21, 2006 at 07:53:19:

John Schaub (Building Wealth One House at a Time: Making it Big on Little Deals) is a RE investor in FL. He has been investing for something like 30 years. He present the case for renting rather than buying. The more you go up market the more you will find people who are renting a home for a lot less than what it would take to own it with a 20% down payment and a mortgage for the balance.

John says he rented 2 homes for a total of 9 years. He only became a homeowner when he had enough passive income that he could cover his total mortgage payment.

There is an underlying assumption going on. John implies (but does not directly state) that wealthy people then to own RE that they do not want to sell but which they are worried about. Getting in a solid long term tenant so they have no hassle and the place will not be broken into is more important than the exact cash flow. The idea that they have no hassle for 5 years is worth a premium and that premium is passed on in the form of under market rents.

John Corey

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Skip

Posted by Skip on May 21, 2006 at 20:08:46:

Hi Robert,

I agree; John’s post described Japanese culture and business practices, but I didn’t see the relationship to the bubble economy.

Are you familiar with Harry S. Dent? If so, I’d love to hear your opinion of him.

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene

Posted by Gene on May 18, 2006 at 17:11:38:

First off, most of the things I have read about vacancies were about speculators that paid way too much and now “have” to rent them for way more than the market will bear.

I think a well managed/run rental profolio with suffiecent cash flow is a great long term stratagy, and will problably do fine in all of this.

On the flip side…if the market turns…what are you opportunity costs? What if you could sell right now, do you think you could get really good deals in a couple years in a softer market?

It not easy but I constantly try my best to analize the risk/reward of each stratagy to figure out what is my best course of action.

For my portfolio, “long term cashflow” stratagy is second to “buy low and sell high”.

There are a few peoperties that I am keeping but I have sold most and am now waiting for the deals (which I think will be more available soon).

Gene

Harry Dent - Posted by Robert Campbell

Posted by Robert Campbell on May 22, 2006 at 10:54:50:

Skip,

Along with other economists, Harry Dent has done some interesting work on the Spending Wave and how it predicts the future of the US economy.

Because I’m leaning toward the dark side these days with respect to where the US economy and the markets are going, I believe you have to be vigilent to the possibility that Dent and others may be right.

“What’s safe today may not be safe tomorrow” is the attitude that you must have in this world.

I’d love to give you my ideas about how to protect yourself from disaster, but that would take a book.

Robert Campbell

Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 18, 2006 at 20:53:35:

It sounds like we are on opposite ends of the spectrum. Long term rentals has always been my strategy. The property I sold last summer (very “wise” as it turned out) was the 1st I have ever sold.

To answer your question, for me… No I don’t think that I could get really good deals (for me) in the future. Because my guess is that the Phx market has gotten to the point where it will never again cash flow. In that respect it is like the SoCal markets. Prices have too greatly outstripped rents and rents will never catch up. So I have my doubts that I ever buy in Phx again.

Selling for me would be for another reason. My ultimate goal is “hassle free cash flow”. For me that means free and clear SFRs. With the proceeds from last summer I paid off one house. If I could sell one more Phx house I could probably pay off 2 more houses. And that would be very close to where I need to be.

Mark